Venezuela Props Up Currency

Published 8:00 pm, Wednesday, February 13, 2002

Associated Press Writer

Venezuela's central bank moved to prop up its troubled currency Thursday, halting the bolivar's slide under a new free-floating exchange system aimed at stemming capital flight.

The bolivar ended the session 15 percent stronger at 850.50 to the dollar Thursday, the second day of trading after President Hugo Chavez scrapped a fixed-exchange rate system. It had closed Wednesday at 980.50.

The currency plunged against the dollar Wednesday, and was dropping sharply again Thursday morning before the Central Bank intervened. Overall, the bolivar has weakened by 7 percent since Wednesday's opening, when it stood at 792.50 to the dollar.

Traders attributed Thursday's resurgence to the Central Bank buying bolivars and some help from local private banks. They estimated the central bank spent between $70 million and $120 million to defend the bolivar. The central bank sells an average of $50 million a day.

Some banks had refused to sell dollars to Venezuelans eager to dump their rapidly devaluating currency, saying they would wait until the bolivar stabilized.

Venezuela's private sector and foreign investors welcomed Tuesday's decision to float the currency, but some business leaders criticized the government for not scrapping the controls earlier. Venezuela spent $6 billion in foreign reserves last year to prop up the bolivar.

The new system has also generated fears that a weaker bolivar will accelerate inflation in a country dependent on imported goods. Economists have warned that annual inflation could rise to between 30 percent and 40 percent. The government's original inflation target for this year was 10 percent.

Venezuelans fear their currency will plunge again once the Central Bank stops buying bolivars.

"Sales were already pretty bad. Now they are going to get worse," said Carlos Alvarez, owner of an electronics store.

The Caracas shop was littered with price tags as employees raced to adjust prices before opening. "Who is going to buy this?" he added, raising the price of a television set by 8 percent. "This is crazy."

Along with the free-floating exchange system, Chavez also announced Tuesday a drastic 22 percent budget cut and withdrawals from a rainy-day reserve fund to help Venezuela close an $8 billion gap in its new $25 billion budget. The original 2002 budget totaled $33 billion.

The measures reflect a new reality of low oil prices, a slowing world economy and sinking investor confidence in Latin America as Argentina struggles through its own economy crisis, Chavez said.

The floating system is designed to stop capital flight, end a depletion of foreign reserves to support the bolivar, and make local products more competitive by raising the cost of imports.

Chavez had resisted devaluating the currency, arguing controlling inflation was key to his promises to help Venezuela's poor majority. The left-leaning former paratrooper was elected in 1998 with overwhelming support from the poor to oust a discredited, corrupt political elite.

Chavez's popularity has plunged to about 30 percent over frustration with crime and the economy. The government estimates unemployment at about 12 percent; private sector estimates are about 20 percent.

More than 20 percent of Venezuelans live in extreme poverty, meaning they earn less than $129 a month, according to the National Statistics Institute.

In a computer store Thursday, street vendor Sonia Reyes stared at a computer she was planning to buy for her son.

"Prices are soaring. Every five minutes the dollar rises and prices rise," said Reyes. "I think I won't be able to buy this computer. I don't have the money anymore."